Saturday, 3 September 2022

Ofgem Price Caps and Scotland

Recent actual and future forecast increases in Ofgem's default energy tariff cap levels are genuinely shocking and have rightly led to widespread calls for government action to deal with an impending national energy bills crisis. 

But in Scotland there is - of course - an inevitably parochial spin being placed on the issue, particularly by those who seek nationalist grievance at every turn.  Take this headline in the independence-supporting newspaper The National:

Quite how they claim that they have an "exclusive" on Ofgem's latest published price caps I don't know. Read the article itself and you'll find SNP international trade spokesperson Drew Hendry asserting that this standing charge difference is "plainly wrong" and this bizarre graph which is presumably intended to illustrate the issue:

This graph commits so many crimes against good data presentation that it is worse than useless;
  • The bar chart is pretty much meaningless -  it mixes a pence per day figure for the standing charge with a pence per kWh figure for the unit cost. You can't stack measures in two different units together; the left hand scale can't be two different things
  • The only way that bar chart could make sense would be if you wanted the left hand scale to be in pence per day, in which case the bar chart as drawn would be showing the cost per day for a household using one kWh per day - but the typical average consumption figure used by Ofgem works out at over eight kWh per day. So the bar chart implicitly shows the daily electricity costs for somebody with 1/8th of typical electricity consumption
  • The green 'typical consumption annual bill' line is hard to read and relates to a right hand scale which is not zero-based - this exaggerates the variance in 'typical consumption' annual bills which is in fact just +/- 3% vs the national average
  • There is no logic I can see to the left-to-right ordering on this chart ... but squint and look closely at that green line and you'll see that, for typical consumption levels, Northern Scotland's annual bills are marginally lower than London's and Southern Scotland's are almost identical. 
So let's unpick this.

First of all the headline claim is technically correct: from October 2022 the standing charge cap [or to be precise, the "standard credit single-rate metering electricity nil consumption tariff cap"] for Northern and Southern Scotland will be £199 and £198 pa respectively vs London's £134 and a national average of £182. So it will (continue to be) roughly 50% higher than London's (by far the lowest in the UK) and 9% higher than the national average.

But on what basis does Drew Hendry assert that this is "plainly wrong"?

I imagine that before opining so robustly on the subject he will have looked at Ofgem's "default tariff cap model" (the second subsidiary document here). This breaks down the components of the tariff cap by region and shows that the differences between Scotland and London are almost entirely explained by the component that relates to Network Costs

Presumably Hendry would then have looked at the analysis behind those Network Costs as explained by Annex 3 (the fourth subsidiary document here). He'd then have seen that (for the nil use case) this figure is made up entirely of a Distribution Use of System (DUoS) charge.

I haven't personally dug any deeper into these DUoS charges, but it seems pretty obvious that the costs of building and maintaining an electricity network to serve remote, low population density areas would be higher on a per customer basis than it would be for areas of higher population density (like London, for example).

As it happens there is a consultation under-way into possible reform of the DUoS system charges. Given that SNP spokeperson Drew Hendry seems so sure that the current charging system is "plainly wrong", I was disappointed (although unsurprised) not to find the Scottish Government among the 26 bodies who have bothered to respond to Ofgem's consultation request on this subject (see "Response Documents" here).

Perhaps it's easier to just assert something is "plainly wrong" than it is to engage with why the charging system is as it is and to actually get invoved in a constructive debate about how it might be changed. At the risk of stating the obvious: if the DUoS charging system reflects a fair allocation of true regional network costs-to-serve, Scotland becoming independent wouldn't magically change that.

But why this obession with the electricity standing charge anyway? The latest price cap increase has seen the standing charge increase by just 2% whereas typical overall average annual bills are increasing by 70%.

The obvious reality is that most people's energy bills, just as with their phone or water bills, are made up of a combination of standing and usage charges - and that usage charge price rises are the big issue here.

So to decide if Scots are hard done by under of Ofgem's price cap regime, we need to look at total capped electricity costs per kWh for different usage levels. 

This simple graph is hard to read because the differences in capped electricity charges between the Scottish regions, London and the GB average are in reality so small. The graph shows the standing charge differences (the very left-hand edge of this graph) in context, that at typical usage levels actual bills are almost identical and that at higher usage levels bill-payers in London pay more.

The cost of energy crisis is very real and massively concerning - but only the most myopic of Scottish nationalists could make this about a grievance between bill payers in Scotland and those in London.

For completeness, it's easy to repeat the same graph for Ofgem's gas bill price caps:

The standing charge price cap for gas is the same for all regions (and has only risen by 1% at this latest review) - and for what it's worth Londoners pay ever so slightly more than Scotland or the GB average for the same usage.

Anybody reacting to the current energy cost crisis by focusing on standing charges and/or trying to create grievance about the way Ogem is treating Scotland is very much missing the point. 


dustybloke said...

But missing the point is essential to SNP survival. They have nothing else to say.

Andrew Hamilton said...

Thanks so much Kevin yet again for the unvarnished facts. Keep up the good work. If Sturgeon gets her second referendum, we will need you more than ever. (If you haven't watched an SNP MSP explain "currency" in an independent Scotland, just google "Emma Harper MSP on currency and credit card". 32 seconds of deluded drivel.)